Thursday, August 11, 2011

An already tight grain and oilseed market got even tighter today as the U.S. Department of Agriculture's National Agricultural Statistics Service (NASS) released its August crop production and supply and demand estimates.

USDA revised its estimate of corn yield to 153 bushels per acre, down from a forecast of 158.7 bushels released in the July report. It said the figure would still mark the fourth highest yield on record, with a total forecasted production of 12.9 billion bushels, up 4 percent from 2010's final production.

"It was a very aggressive revision in corn yield," said Ohio State University Extension economist Matt Roberts.

Hot, dry weather played a significant role in developing a crop now presumed to be much smaller than market analysts had anticipated. The average of pre-report private estimates for corn yield was 155 bushels per acre.

"Obviously with that cut we have to see demand-side rationing," Roberts said. "NASS projects feed use will be rationed by another 150 million bushels, ethanol use by 50 million, and exports by 150 million."

While Roberts said reductions in feed and export usage seem reasonable, he did not see enough rationing to cut corn used for ethanol by the same magnitude as the USDA figure.

"There is not an indication that margins will actually fall that much right now, so it's not clear how that rationing will occur. However, there is a reality that at these sorts of price levels we're in uncharted territory."

The corn market opened limit up following the report's release, reacting to the 550-million-bushel cut in the production estimate and 156-million-bushel drop in projected ending stocks.

Soybeans, meanwhile, saw USDA trim its estimate of yield to 41.4 bushels per acre, down from the July projection of 43.4 bushels. That pegged total production at 3.06 billion bushels.

"That's roughly 60 million below the bottom end of pre-report expectations. Soybeans look relatively tight, but compared to corn we're not seeing nearly the same tightness in the market. USDA forecast a reduction in exports and a small reduction in crush, but most of the change will be in exports."

USDA forecast a midpoint soybean price of $13.50 per bushel, up from $13 last month. It forecast a midpoint corn price of $6.70 per bushel.

Evaluating the numbers, Roberts said the key takeaway for farmers from the August report is the importance of watching margins in livestock production.

"What it means is the summer of 2012 will look very similar to the summer of 2011. There will be concern about feed availability because stocks will be very tight, and in some areas we'll see very high basis. You've got to watch margins if you're a feeder. Luckily meat prices have been relatively strong in recent months, but you have to watch and be careful about buying grain and not protecting your fed-animal price. You're in a margin business, and it's always dangerous to lock in one leg without locking in the other."